Junk Bond Default Rate At Just 1.9% In Q2 – Moody’s

By Michael Aneiro

If you’re worried that junk bonds look pricey, you should be. But if you’re worried that junk bonds are about to start defaulting left and right, fear not. Moody’s reports today that the default rate among U.S. speculative-grade companies weighed in at just 1.9% at the end of the second quarter, up just slightly from 1.8% in the first quarter, while the global default rate fell to 2.2% from 2.3%, both well below long-term averages. A year ago the U.S. default rate was 3.0%, and Moody’s expects that rate to finish 2014 at 2.5%.

“Credit market conditions remain benign and continue to allow lowly-rated companies to refinance debt when needed,” said Albert Metz, managing director of Moody’s credit policy research, in a statement. “Robust liquidity, a major factor that supported low default rates in the past few years, will likely remain in place in the near term, keeping the global default rate in the range of 2.0%-2.5%.”

Moody’s also says the quality of the covenants governing high-yield bonds declined a bit in June.

Taking the temperature of the high-yield market, which has already returned 5.69% so far this year: the average junk bond yields 5.035% today, up from an all-time low just below 4.9% last month, and trades at a price of 105.55 cents on the dollar and a spread of 3.51 percentage points over comparable Treasury bond yields, per a benchmark Bank of America Merrill Lynch index.

Checking in in on the big high-yield bond exchange-traded funds, the iShares iBoxx $ High Yield Corporate Bond Fund (HYG) is currently down 23 cents at $94.38, while the SPDR Barclays Capital High Yield Bond ETF (JNK) is down 14 cents at $41.38.

Amey Stone is Barron’s Income Investing blogger and Current Yield columnist. She was formerly a managing editor at CBS MoneyWatch, MSN Money and AOL DailyFinance. Her responsibilities included overseeing market coverage and personal finance topics. Prior to those roles, she was a senior writer at BusinessWeek where she authored the Street Wise column online and contributed to the magazine’s Inside Wall Street column. Topics covered included economics, corporate finance, Fed policy, municipal bonds, mutual funds and dividend investing. She co-authored King of Capital, a biography of Citigroup Chairman Sandy Weill. She is a graduate of Yale University and Columbia University’s Graduate School of Journalism.